Who is damaged by the current superannuation system?

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Eva Cox does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Media stories about possible changes to superannuation tax concessions generally focus on the “dangers” of reducing the unfair benefits of better off super contributors. Most stories come from financial journalists who voice the views of the finance industry, or offer opinion pieces from the various financial institutions that benefit substantially from the current system.

There is little, if any, coverage of some very respectable alternate views, such as from the Henry review, the Australia Institute and much of the welfare sector. Therefore there is little or no media discussion of the harm of both reduced spending options and the current badly distributed tax concessions.

“But when it comes to the really rich (mainly men) suckling on the teat of government through disguised spending programs like superannuation tax concessions, Labor hasn’t yet decided what to do, despite knowing of the problem for at least three years.”

Superannuation tax concessions cost $30 billion last year in forgone revenue. According to the Treasury in its recently released Tax Expenditures Statement, that figure will skyrocket to $45 billion in 2015/16. The concessions are threefold – low tax rates on contributions to superannuation funds, low tax rates on fund earnings and by and large no tax on retirement streams paid to superannuants when they turn 60.“

My first concern is that the loss to government income of less tax paid by higher income earners means less money in the kitty for other programs. One third of the income foregone would easily cover the Gonski education reforms, or the National Disability Insurance Scheme, for instance, without seriously affecting most recipients’ retirement income, just high income earners.

However, another major problem in the longer term is that the super debates override any serious focus on the health of the second pillar of the system, the adequacy of the Age Pension for those who have little or no access to the benefits of the tax concessions.

"Reforming the current system of retirement income and savings, including the age pension and superannuation that is tied to paid work, to account for the inequity of retirement incomes and savings that leaves many women in poverty in older age, especially women who are or have been unpaid carers.”

Their problems arise partly because superannuation’s basic design reproduces the inequities of the distribution of earned income. Compulsory contributions as a set percentage of pay, means the “savings” will reflect the frequency of contributions and their amounts.

The more time in paid work and the higher the pay received means the range of savings will reproduce the relative inequalities of labour force participation and rewards. This has obvious gender implications as women tend to earn less when in jobs and take more time out of paid work as well, so end up with substantially less.

These differences are inevitable in an employment-based system but the real problem is the design of the accompanying tax concessions which penalise lower and no income earners and very generously rebate the well-off. Until recently the flat 15% tax regime overtaxed low income contributors and still overtaxes their fund earnings.

It will cost about $1 billion a year to refund their overpayment, but the Coalition may cancel the repayment. The maximum refund to the three million-plus low earning workers is $500 per annum, which suggests some may be owed many times the amount for past overpayments.

The government doubled the tax on the top 1% earners but Treasury in its most recent Tax expenditure statement warned over the course of the next four years, concessions on superannuation may cost taxpayers more than $150 billion. Last year it cost $30 billion, around the same as the aged pension.

There would be ample funds available, were the current concessions to be reversed, to make sure we can meet the needs of the ageing population who have little or no savings in superannuation and also may not own their own homes. Many of these will reach “retirement” in the next couple of decades, including many single women coming out of marriages.

Their savings and super balances will be very limited. Over the last decade there has been considerable easing of the means test so people with quite high incomes can get a part pension and some concessions, but there has been only one real rise in the pension level itself. There has been no discussion on long term adequacy, except by super funds scaring people into contributing more to their super.

The promotion of the Age pension on its own as inadequate, goes with the wider view that we are responsible for our own retirement income. There may be some interest in offering long term carers some extra government contributions, as proposed in the Investing in Care report, because they are seen as worthy.

However, others who don’t fit that description are right off the policy agenda. The focus on inadequacy is occupied by the punitive levels of Newstart type payments, with pensioners seen as better off. However, in the longer run, as our population ages, we need some serious discussion on long term adequacy.

There are a series of policy questions that should be on the present election agenda. Should the government look at offering some extra retirement subsidies to compensate low and no income earners for being overtaxed on contributions and earnings over the past 20 years?

Does the range of unpaid contributions, more often made by women, deserve some financial recognition if these limited their paid work and savings? How do we ensure that the basic retirement pension offers a decent living standard to those mostly dependent on it alone?

In the current political debates on retirement incomes, the main voices being heard are primarily the self interested and the powerful.